AP: Why we need to reduce our pension obligation
Two days after the AP union issued its "Tweet-out" memo, the Associated Press sent a letter to employees saying that it's bargained in good faith during the last five months and that "throughout the negotiations, we have been clear that freezing the defined benefit pension plan by July 1 is essential to the health and future success of AP." || From the Associated Press memo:
Since January, we have said at the negotiating table and in our notes to the field that this change must be enacted soon if we are to fund the projects AP needs to maintain our market position and to prevent further erosion of our revenue. External competition to our news business remains fierce, and we must have the cash to be able to maintain our competitive advantage.
The full text is after the jump.
To AP US Staff:
We are entering the sixth month of negotiations with the News Media Guild, which represents certain AP editorial and technology employees in the United States. AP has bargained in good faith throughout, without any delays, and has provided the Guild with thorough responses to scores of information requests.
As you should be aware from the notes we have put out after each bargaining session, AP made only a few proposals, in an attempt to keep the talks focused on key critical issues. In its public communications, the Guild has made it clear that the two most objectionable proposals are the change from a defined benefit pension plan to a defined contribution pension plan, and the proposed changes to the health plan.
AP dropped the health plan proposal completely, in the hope that it would bring both sides to agreement on contract terms in a timely manner. But we still don’t have a deal. (A report on AP’s proposals as they stand today follows this note.)
Throughout the negotiations, we have been clear that freezing the defined benefit pension plan by July 1 is essential to the health and future success of AP. In order to do so, AP must commence a legal process well in advance of that date. It now appears uncertain that we will meet that crucial date, despite major concessions by the company that were made specifically to clear hurdles to a July 1 freeze date.
I want to refresh your understanding of the broad issues confronting AP and underline the key aspects of the company’s pension proposal. These are issues of utmost importance both to individual employees and to the whole of AP. I also want to clearly explain the defined contribution plan, which the company has proposed as a replacement plan.
Broadly, there are two significant trends driving our proposals. The first is the change in the overall media and news environment. AP has been a leader in the shift to digital markets, but many of the companies that we rely on for revenue have been devastated by the change. For example, we’ve seen 20 newspapers close or switch to online only publishing in recent years, and dozens of others have dropped circulation precipitously or consolidated. The impact on our overall revenues has been significant. Here’s our revenue picture:
That’s not a pretty chart. But it would look much worse if not for the hard work, engagement and creativity of AP employees.
The second trend is the dramatic increase in cash needed to fund our traditional pension plan. AP has aggressively funded its pension plans, adding more than $70 million over the last eight years. Our investments have been managed very carefully and have regularly exceeded benchmark returns. Even so, similar to compounding interest, the pension obligation still increases year after year as salaries go up and length of service increases. This has been exacerbated by overall poor market returns.
Here’s a projection of AP’s required cash contributions for the US pension plans:
The trends are clear, and are not running in our favor. We must change the pension plan to keep this situation from becoming catastrophic. Since January, we have said at the negotiating table and in our notes to the field that this change must be enacted soon if we are to fund the projects AP needs to maintain our market position and to prevent further erosion of our revenue. External competition to our news business remains fierce, and we must have the cash to be able to maintain our competitive advantage.
Without a freeze, AP’s required contribution would be $65 million higher over the next five years. Without a freeze, our pension liability will continue to grow. This simply is not sustainable. With nearly two-thirds of our expenses going to employee salary and benefits and the rest primarily to rent and utilities, supplies, communications and assignments, there isn’t much room for financial flexibility.
If we aren’t allowed to control our expenses with a change in the pension plan, we will have to cut elsewhere, which will further diminish our ability to increase revenues.
AP has proposed replacing the defined benefit pension plan with a defined contribution plan going forward. There are two important things to know about that. One, this change would not be retroactive. Employees will keep what they have earned in the defined benefit plan. AP will pay more than $100 million in the coming years to ensure the preservation of those accrued benefits. Then, future retirement contributions would be made into a defined contribution plan.
Two, hundreds of AP employees already participate in the defined contribution plan. It’s the plan that has been in place for everyone hired since 2006.
What’s the difference between the two kinds of plans?
In a defined benefit plan, retired employees get a specific amount of money -- the defined benefit -- for the rest of their lives. In a defined contribution plan, retired employees get a specific amount of money that is based entirely on what the company has contributed, plus any growth generated by their chosen retirement fund(s) and compounding interest.
In either case, those benefits are in addition to the 401(k) plan that AP already invests in for you.
Staffers who are in the defined benefit plan would keep every cent earned in that plan and begin earning new benefits in a defined contribution plan. To ease the move to the new plan, the company is adding an additional transition benefit. That additional benefit recognizes those employees who don’t have seven to 20 years to manage their contributions and benefit from compounding interest.
We are asking the Guild to accept the same plan that will be put in place for administrative employees. It’s only fair that everyone at AP share the responsibility for AP’s financial health.
We have taken every possible step to alleviate the problem; this proposed change isn’t a first resort. Most of you know we have been managing expenses tightly for several years. We’ve also done some things that you may not know about, like moving and consolidating offices to save on our significant rent expense. But the fact is, we are a people company - nearly two-thirds of our expenses go to the people who work for AP.
That’s why those trends illustrated on the charts above are so important and why we need to reduce the pension obligation. Realistically, pension expenses are the only place left to cut at a time of declining revenues and increasing competition in the industry, without cutting into AP’s core businesses and ability to put out its core products. That wouldn’t be good for AP, and it wouldn’t be good for the people who make AP what it is.
All of the information in this note has been discussed with the Guild numerous times over the past six months. Nothing is new, and complete information in support of AP’s proposals has been provided to the Guild. AP remains committed to reaching a fair deal with the Guild at the table. The timelines need to be met, and we remain hopeful that the Guild will agree to do so when we meet next week.
With anticipation of an agreement, we can move on to the business of making sure AP remains a leader in news. We will keep you posted.